In the past 30 days, 21 analysts have increased their EPS projections for this data storage company. The shares have a current dividend yield of 3.97%, paid quarterly.
Seagate Technology plc (STX)
From Argus Weekly Staff Report
BUY-rated Seagate Technology plc slipped 4% in a down market on 1/22/21 after the company topped consensus revenue and non-GAAP EPS expectations for fiscal 2Q21 (calendar 4Q20). The company also issued guidance signaling stronger top-line momentum into early calendar 2021 (fiscal 3Q21). Post-release weakness in the stock may have reflected top-line guidance for fiscal 3Q21 that was in line, with rather than above, the pre-reporting consensus.
For fiscal 2Q21 (calendar 4Q20), Seagate reported revenue of $2.62 billion, which was down 3% annually and up 13% sequentially. Revenue was above the $2.55 billion midpoint of the $2.35-$2.75 billion guidance range, and above the $2.56 billion consensus call. Non-GAAP earnings for fiscal 2Q21 totaled $1.29 per diluted share, down 5% year-over-year from $1.35 but up $0.26 sequentially. Non-GAAP EPS exceeded the top of management’s guidance range of $0.95-$1.25 and the Street forecast of $1.13.
For all of FY20, revenue of $10.51 billion was up 1% from $10.39 billion in FY19. Non-GAAP earnings totaled $4.96 per diluted share, up 3% from $4.80 in FY19. For fiscal 3Q21, Seagate forecast revenue of $2.65 billion, +/- $200 million, for a range of $2.45-$2.85 billion. It also projected non-GAAP EPS of $1.30, +/- $0.15, for a range of $1.15-$1.45. At the respective midpoints, revenue would be down 3% year-over-year and non-GAAP EPS would be down 6% year-over-year, and about flat on a sequential basis. We note that Seagate is a serial under-guider and over-deliverer.
Given Seagate’s persistent better-than-expected results, as well as favorable demand trends in the mass storage space, we are raising our FY21 non-GAAP earnings forecast to $5.17 per diluted share from $4.87. We are also raising our FY22 forecast to $5.85 per diluted share from $5.44. Our FY21 and FY22 forecasts are fluid and subject to revision. Our long-term EPS growth rate forecast for STX is 10%.
After a challenging fiscal 2020, Seagate has displayed solid sequential momentum in the first half of fiscal 2021. Profits have begun to improve as demand has strengthened, and as supply-chain, production and go-to-market costs have normalized. Seagate is also benefiting from a higher mix of mass-capacity drives for cloud customers. Going forward, the enterprise market is expected to gradually improve, while data center is expected to remain strong.
Seagate continues to roll out new products as it targets high-value-added markets including near-line drives for enterprise and data center applications.
Seagate recently announced a 3% hike in its quarterly dividend, and also added $3 billion to its share repurchase authorization. Stock buybacks added to EPS progress in fiscal 2Q21. In a challenging time, this focus on shareholder returns sends a reassuring message to investors.
As industry demand recovers and normalizes, Seagate will for the first time meet an accelerating demand and pricing environment with a portfolio aligned with growing market opportunities, rather than with an overreliance on the client end market that formerly dominated. With the company’s shift toward growing, high-value-added markets, STX shares appear undervalued at current levels.
STX trades at 11.6-times our FY21 EPS estimate and at 10.3-times our FY22 projection; the two-year forward average P/E of 10.9 is near the average P/E of 10.7 for FY16-FY20. Given the long-term lag in STX performance, however, the two-year forward relative P/E of 0.47 is below the five-year average of 0.63.
With industry rivals moving up sharply, peer indicated value has risen to the upper $80s in a rising trend, and remains well above current prices. Discounted free cash flow valuation points to a terminal value in the $110s, now edging higher. Our calculated fair value of $99 per share is in a rising trend and well above current prices.
Overall, we believe that Seagate is closer to the end of demand and pricing weakness in memory than to the beginning. As industry demand recovers, Seagate will for the first time meet an accelerating demand and pricing environment with a portfolio aligned with growing market opportunities, rather than with the client end market that formerly dominated. We are reiterating our BUY rating with a 12-month target price of $75.
Jim Kelleher, CFA, Argus Weekly Staff Report, argusresearch.com, 212-425-7500, January 29, 2021